Hold defensive assets in case of a correction

This article is part of
Guide to investing in 2020

Hold defensive assets in case of a correction

The General Election in December may have answered the question about which party will be leading the country over the next five years, but uncertainty remains.

If a new trade deal is not agreed before the end of 2020, investors and markets will continue to worry about a harder form of Brexit until an agreement is reached.

Meanwhile, the UK continues to struggle with many of the secular trends evident in other developed economies, such as an ageing demographic, disappointing productivity and rising debt levels.

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Thus, during a weakening economy or periods of volatility investors will be hoping that by increasing their exposure to defensive stocks this will give their investments the right level of protection.

Defensive stocks

A defensive stock is a stock that provides a constant dividend and stable earnings regardless of the state of the overall stock market. 

Within the equity part of the portfolio, water, gas, and electric utilities are an example of defensive stocks because people need them during all phases of the business cycle. 

Companies that produce or distribute consumer staples, which are goods people tend to buy out of necessity, regardless of economic conditions, are also generally thought to be defensive. 

Cash, gold, healthcare stocks and real estate investment trusts are also examples of defensive stocks.

Tom Stevenson, investment director for personal investing at Fidelity International says, owing to significant uncertainties in the year ahead both in the UK and beyond, this means demand for defensive assets is unlikely to disappear in 2020.

Mr Stevenson adds: “Defensive assets such as gold and, of course cash retain their attraction this year. Gold represents a good hedge against the possibility of rising inflation, which some believe could see a resurgence at some point. 

“It is important to hold some cash in reserve to take advantage of any market correction, which is significantly more likely at the end of a stellar year in the markets in 2019 than it was 12 months ago.

“In an environment of persistently low interest rates, such as we are likely to see in 2020, the defensive attractions of high-yielding equities will remain compelling.

"Moreover, with the threat of widespread nationalisations off the table in the UK, traditionally defensive sectors like utilities are likely to bounce back.”

Nonetheless, the outlook for defensive assets will be challenging.

The returns on cash, gold, and defensive assets such as bond proxies are all under some pressure today with the move up in UK ten year gilt yields. 

Holding gold

For gold in particular, Matthew Cady, investment strategist at Brooks Macdonald says this is the quintessential negative-yielding asset. 

In the absence of inflationary pressures globally, as well as a moderation in recession risks following a better than expected US earnings season, he sees possible headwinds for gold.